High housing prices and low rental yields in Auckland are causing many experienced investors to sit on the market sidelines or buy properties in other parts of the country, according to the president of the Auckland Property Investors Association, Andrew Bruce.
However many first time investors are still jumping into the Auckland market.
"The people that are more developed in their portfolios, they may understand the market cycles a little bit better than those who are just wanting to get into the market right now," Bruce said in a Double Shot video interview with interest.co.nz.
People who had owned their rental properties for a few years had certainly been helped by the combination of rapidly rising house prices, steadily increasing rents and low interest rates, which would have boosted landlords' equity and increased their rental incomes, he said.
But the downside was that rents had risen more slowly than prices and that reduced rental yields made buying additional properties a less attractive investment proposition, unless you were primarily chasing capital gain
Bruce said people often confused investors with speculators and the difference was that investors were buying for the long term, while speculators where buying to resell a property for a quick capital gain.
Many experienced investors were choosing not to buy further properties in Auckland, because although prices might keep rising, the rental yields were low and cash flow could become an issue when interest rates eventually start to rise again.
Instead they were using their rising rental income to complete maintenance or refurbishment work on their properties, having them revalued and restructuring their finances to take advantage of some of the very competitive mortgage deals banks were offering.
Bruce said many experienced investors were "in a little bit of a wait and see mode."
Hamilton, Tauranga and Rotorua
Those that did have spare cash and were wanting to add to their portfolios were often looking to buy properties in places like Hamilton, Tauranga and Rotorua, where prices were lower and rental yields were higher, giving them better cash flows.
"Rotorua has a lot of landlords who are Auckland based," he said.
Bruce said he was one of them, and that he had bought his rental property in Rotorua when the last market cycle was at about the same point as this one.
However many first time investors were still jumping in to the Auckland market, often because rising property values had increased the equity in their home and they wanted to borrow against it to buy an investment property.
"People who are newer to the market, they may not follow the [market] cycles so much and once they are in the position that they've got some extra equity, either in their property or because they've come into some extra money, they tend to jump into the market when they are ready," Bruce said.
"That was the situation I was in when I started investing. I didn't wait for a cycle. I didn't really know about cycles.
"I just went into it because I could afford it and was all fired up and ready to go."
'Interest rate will go up'
Bruce said one of the biggest risks investors buying into the current Auckland market faced, was a rise in interest rates and the effect that could have on their cash flows if they were highly geared.
"There's risks with everything, but as with any business, cash flow is king," he said.
"I don't know when they'll go up [interest rates] but at some stage they will."
"That's going to put the squeeze on something that works at today's interest rates."
However he doesn't think the supply of new houses is likely to catch up with demand in Auckland in the foreseeable future.
"There's a lot of noise out there about properties being built in these special housing areas, but it's still hard to get things through [the regulatory process], he said.
"It's still not a quick process and it's still an expensive process.
"Yes, there will be more houses built, but whether it's going to catch up with the 20,000 shortfall or whatever the number actually is?
"Yes there'll be a slight catch up but I don't see it getting to a neutral position, in the next two or three years anyway."
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33 Comments
Now that we have admitted the market is being driven by speculators, are we getting closer to calling it a bubble? Nice to hear that it is a perceived shortage. Cashflow is King, as with any business, and yet like many businesses today cashflow is negative and funding comes from capital gains. I include such companies as Xero in that assesment. Bizzaro world we live in, where speculators will pour money into loss making businesses in the expectation there will always be a greater fool willing to pay more for said business which could not exist without said speculators.
I get the impression that many of the non resident buyers don't care about cycles or even returns. Rather it's more about diversifying/shifting some of their assets away from their home market and into any other country stupid enough to allow such investment. Especially into a safe, politically stable, largely uncorrupt, gullible little western country like us.
Especially countries that don't have the death penalty, where the target country won't extradite people if the sentence can result in execution ie New Zealand and Australia
Very attractive benefit
One source country, which has been pursuing corrupt felons under the "Fox Hunt" program has moved up a notch to a more aggressive program called "Sky Net"
Sky Net: China's overseas anti-corruption campaign MK 2.0 http://www.chinadaily.com.cn/china/2015-03/27/content_19933384.htm
Following last year's "Fox Hunt 2014," which targeted corrupt officials and suspected economic criminals who have fled the country, an upgraded campaign codenamed "Sky Net" was launched on Thursday, bringing more government departments on board, including not only party organs and law enforcement agencies, but also the central bank and diplomatic services.
T.O.G
Not far to look from here...Sky City is quite close to home, from here. Maybe sky net three will count..Second or third home to some.
Boards and directorships, both here and overseas. I have heard that moneycan be used as laundry, not that it would dry up...much. But it seems to for some poor sods.
Many deals aledgedly done under the counter, roulette and revolving doors, loans and incentives. Rates have been adjusted to achieve parity.
I hear many countries are encouraged to buy up as much property as they like overseas, at any costs. No returns required. Coals to Newcastle, Solid Energy just dried up.
Just bring a bucket, so that exchange rates and the futures can be established, though they seem to fluctuate daily.
One arm bandits will snap yer hand off, if not careful. Billions seem to have gone astray and mis-use of the taxpayers money so I hear.
Spying on neighbours too, even if they have a trade deal already in hand, it is just par for the club..
Bribes bridge continents and sometimes closer to home.
Labour is bought in to fill gaps. Sometimes they purposely let others get in on the act.
Interest is declining to achieve the objectives set. Not inflated to the objectives set.
Often Old-age pensioners are being robbed blind, but cannot see the wood for the trees, the milk for the table and even paper boys have been targetted.
It is a bit rich, when one cannot even trust the old money go round, when it keep revolving away from the old fingers to the sticky ones....often imported from overseas, just for the occasion..
Yep, corruption needs to be sorted, once and for all.
Not just over and over again for the few by a few till their hands must be raw and the poor young think that graft doesn't mean work, but something else.
Have babies. more money in that to offset the costs of milk-powder dropping, but never drying up. But houses have...how strange.
But, I do not really blame them. One parent families have been exported all around the world, Sky Net is not that one-eyed that a Fox Hunt could not find a link between exported and imported billions, surely going missing back and forth daily.
But, nothing will be done, and that you can bank on.
2008 was a test. GFC a get out of jail free card and they still do, with conniving, thieving rapidity.
I belive it is to be known as World Wide Rort111. this time. War is so passe.
But no one is bought to account, because they are in the club...not the family way.
Pity we do not just have a way withwords, but it would be nice if the Fraud-u-lent Squad and the Not so Serious Securities Ommission and the Imported Credit Union were banned from not having a say in the destruction of the civilised financial world and the inflated practices therein, initiated by the ungodly for the unwary and perhaps revert back to a fixed exchange rate, a fixed inflation rate and a fraud rate in the ones and twos...not trillions.
With the connivance of those we used to hold in high esteem....and who should be locked up in perpetuity.
I would particularly like a fixed parliamentary system, cos this lot is not working to my satisfaction....As it is fixed, beyond redemption.
In more ways than I care to illuminate.
Here's the thing, see, people keep banging on about the free market and how its swings and roundabouts and ups and downs, yes maybe, but we have never, as far as I know, ever had the rogue element of having people from another country who have accumulated a lot of wealth but are unable to purchase land in their own country, so the game is changed. We are stupid to refuse to acknowledge this, and we are even more stupid to keep allowing foreign ownership of land here. This money is not concerned about an over-inflated market, it is more concerned about having some sort of get out of jail card for the future and it is damaging us. There is no reason not to do something about it.
Here's a question. As we allow land and property sales to foreign investors from countries who print money, will this have the same effect on our economy/value of our $, in the long run, as printing money ourselves? Therefore eroding the wealth of the average person, in favour of foreign investors and a few lucky people selling out to them? I apologise if i haven't worded this very well.
It inflates the prices in the local market.
local money falls in value as it loses buying ability. (appears like inflation, with target assets holding value through deamdn)
the foreign sourced money isn't affected by the changes in the market.
local change CANNOT use market pressure to change behaviour, as the fuinding is from remote (isolated) source.
The receiver of the purchase price, gets a "today price".
If the market is falling (remember I just said it wasn't, it was apparently inflating) then the cash paid acts as "value store".
But in an increasing market, the paid cash devalues compared to the asset (time of money) this is the "beads and blankets" effect.
What an interesting Q. However other countries are QEing and not printing it isnt quite the same. So some assets are inflated, but we odnt know by how much because we dont know how big the foreign investment is in our market. Personally I think its big enough to have a noticaable effect and should be stopped.
True wealth is per capita IMHO and its also our resources and not this "bubble housing wealth" so with more ppl coming in we get poorer per capita.
The real worry for me is when this foreign money turns and runs, I think this will cause a ***pop*** like no other.
Here's why it's never going home and never leaving these shores
Read the full story
http://www.smh.com.au/business/china/a-chinese-prisoners-dilemma-as-man…
Oh that kind of stuff will make it's way here soon enough.
The US is having problems with it's police force becoming militarised and a tool of those who weild it, not just a "rule of law" where everyone is supposed to have and be exposed to justice.
In China you have to remember to pay your taxes, your other taxes, and your "other taxes" to those who have helped you along the way.
Too successful and you will find committee members appointed to assist you in runing the business for the good of the people, protest is treason and considered corruption (as the government and it's helpers are considered to be the equivalent of beatified)
I'm seriously wondering if some of our OIO and National party are either complict or sociopathic, give how much of NZ they're just giving away.
The TPPA will allow Chinese businesses and government to prosecute NZ and NZ government "in order to protect Chinese people and Chinese peoples' interests", and they have much deeper pockets than we do. Not to mention the use of foreign companies with links to ranking officials wanting favours.
Our laws were designed centuries ago to prevent "temporary detainment" of business or political opposition. Sad to see it come back under this government
I think its not a case of unable to purchase but simply that they have soo much wealth they are looking for assest that are not as badly inflated as others and hence will see a gain. The free market is a crock of doo doo IMHO, it just lets the sharks gorge as they want, great if you are a shark. Time to stop it IMHO.
One of my co workers has Been looking for another rental since Xmas. But is wary because he can't make the figures work. He already owns one in that he tips in $100 a week to run. And the bank has given him a pre approved loan to buy another using the increased equity in his home and the rental which with the yields in AKL he would have to to in as well. So his aim is capital gain and at the moment he is way ahead
If there was no capital gain incentive he would not even be trying but the rules are what they are so he sees it as his way of getting ahead
if he's putting in money (neg cashflow) then he really shouldn't be looking at high end secondary streams.
We've done the numbers on this site before, negative gearing is not a long term success formula. If he's having to top up his existing holdings, where is he financing the ante for the next one from?
yes it would be good if someone explained the mechanism of NZ's QE through the auckland market. I suspect it's not as obvious. Here's my rudimentary understanding - please correct me if i'm wrong.
QE isn't really money printing, the FED for instance loans at zero interest to primary dealers (an asset on the fed balance sheet and liability on primary dealers so no change in money supply) this allows primary dealers to liquefy the market. The overall effect is that commercial banks which might have been insolvent can keep lending at lower rates for longer.
The real "money printing" occurs when commercial banks like kiwibank ASB BNZ etc issue mortgages, mostly for buying houses. The loan is created into existence as an asset to the bank and a liability to the debtor. It is the interest on the loan which represents new money created into the system. More importantly, at the instant the loan is created new money is injected into the system, and even though it needs to be paid back, it adds to the aggregate demand driving the economy. That's the view of a non conventional economist like Steve Keen who observes the second derivative of debt with respect to time, and the overall level of private debt are probably the two most important overlooked metrics showing the health of the economy.
If money is loaned in China at 2% to someone wanting to buy a rental property in Auckland, then those Ywan have to purchase NZD first. This drives the exchange rate up. Kiwis buy more stuff from China which erodes the balance of payments. When the NZD gets too high then Graeme Wheeler tears his hair out and sells NZD which is currency intervention (that's real wealth destruction for cash holders). The point is that loans issued in China contribute to aggregate demand in New Zealand... maybe ?
fp,
I think largely you have it. My understanding is that our QE isn't really our QE, we are using the QE undertaken by foreign countries, of which Germany, Japan, China and Switzerland have been the most obvious instigators. We are missing out on market share, as those countries print money to buy up the assets of the world. If they slightly overpay, what do they care. The Swiss were the best example, with their Reserve Bank having printed 100% of their GDP, and 12% of that total was in foreign equities. These countries get a double win, with the currency effects also supporting their trading industries.
A good amount of the foreign money coming in is straight cash, with no need for local funding. The local banks also have expanded their balance sheets (printed a lot of money) as you note, but to some extent have then had the capital underlying that funded offshore instead of through our own Reserve Bank.
Those of us still owning houses feel wealthier than ever, and overseas holidays are nice and cheap.
Am not at all sure our approach is a good long term plan though.
I wonder if there is a flaw in the plan of this world wide QE. Is the money being invested wisely in real businesses with balance sheets that make sense. ( when you are borrowing money cheap it does'nt matter if you make a profit?) Or are they just buying assets. As someone said earlier cashflow is king. Is the world going to end up with more inefficient less profitable businesses? and could this problem accelerate?
Christchurch housing market flattening and turning to oversupply:
http://www.stuff.co.nz/the-press/business/67609049/housing-shifts-in-fa…
It feels very 1997 or 2006 to me, some buyers are heading for a bruising with current prices being paid and undercapitalised developers embarking on overly ambitious projects may as well get their insolvency proceedings booked...
Everyone has forgotten that there are limited insurance proceeds and that insurance money is coming to an end. The insurance proceeds and associated gravy train also found there way to Auckland, in part fuelling its boom as well.
http://www.bloomberg.com/news/articles/2015-04-03/cyprus-lifts-capital-…
More Greek bull-puckey. Island style.
When certain people think they have cracked it,they certainly have.
This is what you call a Greek tradegy, but more so for those who put money on the deal and gambled with their deposits and created by bad luck and carelessness the first ever bail-in in modern history.
And shafted both men and women, which puts a new meaning on the usual term....for a Greek deposit via a different passage in their history.
And now we are potentially learning from the Greeks, so now I am really nervous.
An OBR is one thing to contemplate, when putting all your eggs in one basket case...because how do you choose...there are lots of them....and most of em cracked..as per the Greek penchant for spending your money, then pretending you were not raped.
So....so the joke will be on you and you may end up with egg on your face so a matteress may cushion this screwing Peter to pay for hitting the bottom of Olympic proportions Greek rorts.
Rinse and repeat.
KY anyone?.
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